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  • 6 of 10 UK mortgage holders have life cover*
  • secure your loved ones’ well-being
  • price at all-time low, cover from £5 a month
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  • helping you find the right policy for you
  • critical illness cover; heart attack,cancer,etc.
  • the whole market compared, fast & free

Level vs. decreasing term cover: Choose your insurance policy according to your mortgage type

Homes purchased through a mortgage are down by 9% from 2001 to 2011, while the number of households that rent increases.*

Some reasons why:

  • High house prices
  • Low wage growth
  • Tighter lending requirements

*A Century of Home Ownership and Renting in England and Wales, Office for National Statistics

As of 2011, 32% of households own their home through a mortgage. This has fallen considerably – the number of houses bought through a mortgage fell by 749,000 from 2001 to 2011.

This can be traced to the fact that with the economic downturn, a higher number of houses were foreclosed, so much so that the government has instituted actions to help prevent the number of foreclosures.

Mortgage life insurance can help prevent the foreclosure of your home in the event of your death.

Types of mortgages and what mortgage life insurance to buy

There are basically two types of mortgages: repayment mortgage, which is the more popular form, and interest only mortgage. Interest-only mortgage comes in a number of types, which will be discussed in this article.

In the tables below you can find out the most appropriate insurance policy to protect your mortgage depending on its type.

Repayment mortgage

What it is

This requires a down payment and monthly payments that decrease the amount of the loan over time. At the end of the mortgage term, the entire mortgage loan is expected to be paid in full.

Advantages of a repayment mortgage
  • Guarantees that the loan is fully paid at the end of the mortgage term as long as you pay the monthly amortizations regularly
  • Decreased risk of negative equity since the loan is decreased over time
  • Increased equity (provided that there are no drops in property value). Remortgages or new loans are easier to get because of your positive credit record
Disadvantages of a repayment mortgage
  • You risk losing out on the down payments and monthly payments if the property is foreclosed or you need to move again during the first few years of the mortgage.
  • You risk losing the property through foreclosure if you fail to meet the monthly payments.
Type of mortgage life insurance coverage

This should be covered by a decreasing mortgage life insurance policy that is designed to reduce the amount of insurance in the same way that the mortgage loan is decreased.

The decreasing mortgage life insurance policy is 30% cheaper than level term.

Interest only mortgage

What it is

The loan is provided on the basis that it will be paid back with interest. What happens is that you pay monthly interest to the mortgage lender while securing a way for you to invest that will eventually accumulate enough money to pay for the principal. The investment plan can be in the form of:

  • An endowment
  • An individual savings plan
  • A pension

The mortgage lender does not have to be the provider of the investment plan.

Advantages of an interest-only mortgage
  • You have the freedom to choose the investment vehicle that is most advantageous to you, considering your situation
  • If you may a good investment, you will earn more than the amount you need to pay to the lender
Disadvantages of a repayment mortgage
  • There is a risk that your investment plan does not grow enough so that the amount you have accumulated is smaller than the actual amount of the mortgage.
  • There may be penalties for some form of investments if you default on the premiums
  • The level of debt you have stays the same throughout the term of the mortgage
Type of mortgage life insurance coverage

This should be covered by a level term life insurance policy, where the cover remains constant throughout the mortgage term.

Interest-only mortgage Type 1: Endowment mortgage with a savings plan

What it is

This is essentially an interest only mortgage, which allows you to pay just the interest on the loan and the entire principal amount at the end of the mortgage term. This makes use of an endowment life policy that covers the person insured’s life and also accrues cash values. When the mortgage term (and the policy term) ends, the endowment paid out will be used to pay the principal.

Advantages of an endowment mortgage
  • If the investments on the cash values do well, you will not only be able to pay off the principal, you may also have some extra money that will be paid out as a lump sum at the end of the mortgage term.
  • You may be able to get cheaper life insurance cover as opposed to buying a separate life insurance policy.
  • The mortgage is transferrable to another property.
Disadvantages of an endowment mortgage
  • Endowment life policies are more expensive compared to a term life policy because of the cash values.
  • You risk facing a shortfall on the principal amount if the investments do not do well.
  • Endowment life policies are not as flexible, where you may face penalties if you choose to cancel the policy.
Type of mortgage life insurance coverage

This should be covered by an endowment policy (also termed mortgage life assurance policy) that has a level amount of cover and a term equal to the length of the mortgage contract. With an endowment life insurance cover, you ensure that the mortgage principal is paid out in the event that you die before the end of the mortgage term.

Know more about mortgage life assurance.

Interest-only mortgage Type 2: ISA mortgage

What it is

This is a form of interest-only mortgage linked with an individual savings account, where the account is a stock market investment. With the investments made, the account is expected to collect enough to be able to pay off the principal.

Advantages of an ISA mortgage
  • If the investments do well, you will not only be able to pay off the principal, you may also have some extra money that will be paid out as a lump sum at the end of the mortgage term.
  • For taxpayers who are under a higher rate tax bracket, an ISA would be potentially tax efficient
  • You get to choose the type of investment the ISA will make, based on the level of risk you are willing to take
Disadvantages of an ISA mortgage
  • You risk facing a shortfall on the principal amount if the investments do not do well.
  • You risk losing the property through foreclosure if you fail to meet the monthly payments.
Type of mortgage life insurance coverage

This should be covered by a level term insurance cover since the mortgage loan remains constant throughout the life of the mortgage.

Interest-only mortgage Type 3: Pension mortgage

What it is

This is a form of interest only mortgage linked with personal pension being used as the investment plan. The personal pension fund is invested in the stock market and its earnings are tax-free. When the pension fund matures, it is used to pay off the mortgage.

Advantages of a Pension mortgage
  • If the investments do well, you will not only be able to pay off the principal, you may also have some extra money that will be paid out as a lump sum at the end of the mortgage term.
  • You enjoy up to 40% tax relief, particularly if you belong to the higher tax bracket.
Disadvantages of a Pension mortgage
  • You risk facing a shortfall on the principal amount if the investments do not do well.
  • A pension plan should ideally be used to fund your retirement, but with this type of mortgage and investment plan, you cannot use the lump sum for other needs as long as the principal is not fully paid up
Type of mortgage life insurance coverage

This should be covered by a level term insurance cover since the mortgage loan remains constant throughout the life of the mortgage.

Making the decision

The decision on what type of mortgage life insurance or term life insurance you buy actually depends on the type of mortgage you have. A level term life insurance will be best for an interest only mortgage while a decreasing term life insurance cover is ideal for a repayment mortgage.

If you are committed to paying for your repayment mortgage without refinancing it, then it is best that you get a decreasing term life insurance cover. Meanwhile, if you are considering the possibility of refinancing the mortgage in the future, then you should get a level term life cover.

Latest update: 18.06.2013

Get your mortgage life insurance quote now, fill our form on the right.

Other sites: critical illness cover, lifeassurance.org.